Spurred by the Brexit’s leap into the dark and Central Banks’ pertinacious determination to fuel markets, US indices have once again hit maximums. Not so long ago most of the principal investment banks’ financial influencers announced, with disquieting clairvoyance, a US recession in 2020. If this prediction is still current, the time for its coming true is quickly approaching. Furthermore, of the 7 months left in 2019, 4 traditionally form the most volatile period in the year (May-August). Now that all seems to go well and that nothing can possibly beat markets after their recovery since December, it is a good moment to remember the call for caution of our January 2019 commentary:
“Listed assets’ valuations magnify market sentiments –upbeat and sluggish–”.
Current markets are beginning to be overpriced, driven by positivism and optimistic long-term forecasts (subdued inflation, persistently proactive Central Banks, responsible politicians who are open to dialog, the unfolding of the European divorce with the longest reconciliation period, and a continuous bubble free global growth). However, the real backdrop is quite different. Growth always entails imbalances, more so when the main catalyst is an exogenous factor (liquidity injections). On the back of these injections, valuations excesses in defensive bonds and shares (bond proxies) have begun again, concealing the risks present in leveraged sectors. Nevertheless, only a spark (predictable or not) will trigger the explosion of these imbalances.
The first spark to come to mind is the US-China trade war: both powers have a vocation as leaders of global economic growth. Conversely, Europe’s vocation leans towards becoming the leader of early retirements and world-wide welfare state; this vocation has been undermining Europe’s competitiveness for years. Both the US and China have politically aggressive leaders and highly imbalanced domestic situations, which they can only control through economic growth. This is why they have both plunged into a war in which they cannot actually shoot (own losses would be impossible to assume) nor stop threatening one another (if they did, it would encourage the “enemy” to increase its market share and control over companies and resources). And, what are these tensions if not a trade cold war, that will not stage great battles (Trump allowing) but will be fought out in innumerable more or less aggressive skirmishes? This scenario won’t last years; it will last decades.
How does this impact markets? It will translate in shorter periods of calm, and also shorter falls. Volatility will come and go, depending on if greater importance is given to the positive growth vector or to the burden of a negative undercurrent of trade interventionism.
On the upside: it is worthwhile to invest and participate in growth in a period in which society embraces technology with a passion unseen since 1908 when the first low cost car was launched (Ford Model T). Back then, the Ford Model T multiplied trade intercourse among smaller and more widely spread agents. Just as the intensive use of motor vehicles multiplied intercourse in the 1950’s and 60’s, human intercourse (and productivity) is currently multiplied by the fact that there is a mobile phone in everybody’s pocket.